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Economy

Pakistan to unveil new tax amnesty to ease debt burden

PM Khan hopes one-time charge on hidden wealth will relieve cash-strapped economy

The tax amnesty plan is being promoted by Prime Minister Imran Khan as a necessary step to help reform Pakistan.   © AP

ISLAMABAD -- Prime Minister Imran Khan's administration is set to announce a tax amnesty this week in an effort to coax Pakistanis to declare unreported wealth, levying a one-time charge of between 5% and 10% on hidden assets.

The scheme is being promoted by the government as a necessary reform in a country with a large black market economy and where only one in a hundred people pay income taxes.

Two senior government officials who spoke with the Nikkei Asian Review on condition of anonymity said Islamabad believes that Pakistanis may have stashed up to $12 billion in bank accounts, property and other assets held overseas.

"Imagine if we can tap into even a part of this wealth," said one of the officials. "That can help our government raise revenue when Pakistan needs it the most."

In recent months, the country has been negotiating a loan from the International Monetary Fund to avert a balance of payments crisis. Discussions between the IMF and government have thus far focused on the Washington-based lenders' demand for Pakistan to reduce its fiscal deficit.

The tax amnesty has exposed Khan to criticism of reneging on promises to curb corruption -- a key plank of his ruling Pakistan Justice Party, known as PTI, which swept into power last summer.

But senior PTI leaders, including Finance Minister Asad Umar -- a Khan protege -- have defended the plan in closed-door meetings. The other official who spoke to Nikkei said Umar is keen to expand taxation in Pakistan, where large swaths of the economy remain out of tax collectors' reach.

The official said Umar told other PTI leaders that "if the amnesty can force more Pakistanis to pay their taxes, then it's a necessary evil which has benefits. We must pursue this irrespective of the criticism."

Tax fraud is rampant in Pakistan. Businesses in larger cities routinely keep two sets of accounts -- one for income tax purposes and the other that reflects the true value of transactions. Real estate deals are also undertaxed, with officially documented property prices significantly less than the actual amount of money exchanging hands.

Leading Pakistani tax expert Ikramul Haq told Nikkei that Khan must follow up the amnesty with reforms to ensure that people who declare their real wealth and pay the one-time tax become regular taxpayers. "In the past, we have had [other] amnesty programs. Every time we have had people step up and pay for their hidden wealth, there has been no follow up," said Haq. "Its very important that people who use the amnesty also become regular taxpayers."

The opposition has used the amnesty to target Khan's economic policies. "There are too many contradictions. For instance, the amnesty program has not been explained in terms of how it will improve the way Pakistan's economy will work in future," said Ahsan Iqbal, former minister of national planning, in an interview with Nikkei.

Now a leading opposition figure, Iqbal said that there must be a purpose that goes beyond "just trying to collect money."

Iqbal also echoed criticism over stepped-up corruption investigations of prominent opposition members, including former Prime Minister Nawaz Sharif and former President Asif Ali Zardari. "If the prime minister wants to attract large new investments, he will not succeed. There are too many contradictions where one policy works against another," Iqbal said.

A senior western economist based in Islamabad who also spoke to Nikkei on condition of anonymity agreed that the amnesty plan must be undertaken as part of a wider campaign to reform Pakistan. "There have been a number of amnesties in the past where people with dodgy money have been allowed to sanctify their wealth," he said. "The real challenge is to improve the way Pakistan's economy works. This includes looking at ways to raise exports [and] improve output in agriculture and industry."

For Khan going forward, the amnesty will just be one more step in a long march to improve Pakistan's economic performance.

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